Banks pursue the 'underbanked': millennial and low-income clients

New York City's status as a global banking capital hasn't helped it solve a vexing challenge: a large population of people who are "underbanked" and have limited access to financial services—or have no bank at all.

Jay and Luvleen Sidhu hope to make a dent in the problem. In January, Mr. Sidhu—a former chairman of Santander and Sovereign Bank—and his daughter Luvleen, who earned an M.B.A. from Wharton, launched BankMobile, which they tout as the first completely mobile bank.

The bank, which has its executive offices in New York City, is actively courting millennials who are still getting established financially. With no physical branches, it is using digital advertising to tout its no-fee accounts and free overdraft protection.

BankMobile is a wholly owned division of Customers Bank in Reading, Pa., where Mr. Sidhu is chairman and CEO.

Since the Sidhus launched BankMobile in January, they've acquired about 3,000 customers nationally, according to Ms. Sidhu. Its services will be available on the Apple Watch, which was scheduled for an April 24 release.

"BankMobile is truly revolutionary," said Ms. Sidhu. "We're bringing [customers] a branch in the palm of their hand."

New York City has plenty of potential customers. Locally, 12.2% of households—or 371,752 in total—have no checking or savings account, compared with 7.7% across the U.S., according to the nonprofit Corporation for Enterprise Development. Another 20.2% of "underbanked" local households—or 615,525—supplement bank accounts with costly financial products such as payday loans, compared with 17.9% of U.S. households.

But acquiring customers for a mobile-only bank could be tough, given that many people are still leery of digital-only banking. Millennials are often more comfortable with financial technology than older counterparts, but Accenture's research in 2014 found that only 27% of all consumers would consider a branchless digital bank. Net Bank, one of the first Internet-only players, ended up selling its core operation to another bank in 2007, after announcing that it planned to close.

Meanwhile, there's lots of competition brewing among both banks and fin-tech companies that have made inroads into the market, which can be profitable. Bill Gates wrote in his recent annual letter that "the marginal cost of processing a digital transaction is near zero," as he announced that his foundation would promote mobile banking in impoverished countries.

'Little risk'

One new player in New York, GlobeOne, plans to roll out a smartphone application later this year that will connect underserved customers in the city and elsewhere to banks, says Philip Valvardi, CFO and head of business development.

U.S. consumers who pay $9.95 a month to the Santa Monica, Calif.-based firm will receive a suite of financial services, such as a deposit account with a debit card, a savings account with a line of credit, free money transfers with other customers and a chance to earn income as a result of referrals through its "Social Boost" program. The accounts will be managed by the banks, which will receive fees to do so.

"We put out a service we really believe will help address financial inequality in the U.S. and other parts of the world," Mr. Valvardi said.Competition among lenders with a strong mobile presence is also hot. "Almost 50% of people who come to us are not coming on a desktop or laptop," said Ron Suber, president of San Francisco-based peer-to-peer lender Prosper, which serves New York City.Meanwhile, PayNearMe, an electronic cash-transaction network, recently partnered with nonprofit microlender Grameen America to let its borrowers repay their debts in cash at 7,800 7-Eleven stores, such as one in Sunset Park, Brooklyn, a location convenient to many city members of Grameen. About 2,600 New Yorkers in Grameen's network will be eligible, said Danny Shader, CEO of PayNearMe, based in the San Francisco area.Some players are going after underbanked customers with more traditional solutions. For instance, TD Bank offers TDGo, a reloadable general-purpose debit card aimed at teens.And many institutions offer a no-frills "safe account," a concept pioneered by the Federal Deposit Insurance Corp. and piloted by banks including Citi and Cross County Savings Bank in Middle Village, Queens, said Ted Beck, CEO of the National Endowment for Financial Education in Denver.In these accounts, the minimum deposit is usually very low, and customers can't make overdrafts that lead to unexpected fees. "It's a way to get people into the system with very little risk they will have something negative happen," Mr. Beck said.Amid all the competition, the Sidhus are confident there is plenty of room for growth. "The majority of the big banks are not going after the millennials," said Mr. Sidhu. "It's really the community banks and the payday lenders."

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